Articles

Finding Treasury Opportunities in the Brexit Chaos

By Andrew Deichler

Published: 5/17/2017

MANCHESTER – Brexit was unsurprisingly top of mind Tuesday at the 2017 Association of Corporate Treasurers (ACT) Annual Conference. Although there are a lot of unknowns when it comes to Brexit, one thing is clear—the uncertainty the UK now faces is only poised to grow in the coming years.

International trade

Monique Ebell, associate research director for the National Institute of Economic and Social Research (NIESR), began by noting that for Britain, there are two key questions when it comes to trade, post-Brexit referendum:

How much trade could be at risk if the UK leaves the single market without any kind of a trade deal?

How much trade could the UK hope to gain by making deals with rest of the world?

Unfortunately, these are open-ended questions; this is relatively uncharted territory. “We don’t know what happens when a country leaves EU,” Ebell said. “We also don’t have a lot of data when countries leave trade agreements.”

However, there are a few certainties for UK corporates. First, the trade agreements that UK business currently make with countries outside the EU for services are, on average, “completely ineffective,” Ebell said. “If we want to do better at trading with the rest of the world, we have to do better at negotiating trade agreements that cover services.” This is an important point, as services make up more than 79 percent of UK GDP.

On the other hand, goods trade is considerably less complicated than services trade, Ebell added. Goods trade will likely increase by about a quarter, especially if tariffs go down. “I’m not worrying about anything, it’s goods trade,” she said. “It will be just fine.”

But for UK corporates banking on new free trade agreements making up for leaving the very large trading block that is the EU, they should think again. If not trade agreement is worked out, the UK could lose about 60 percent of its services and goods trade.

On a positive note, since the referendum, there has been substantial interest in the UK in the technology sector. Both Google and Dyson are investing in research and development (R&D) in the UK. But why are these corporations investing in UK, post-Brexit? “One of the reasons that technology works well for Israel is one of the reasons technology might work well in the UK—trade in R&D is hidden,” she said. “How would that work in the UK? Services are embodied in goods—the research and development, the marketing, the finance, the logistics. Those things contribute to the value of goods, even if they’re not manufactured in the UK. They may never touch UK shores.”

For example, a high-tech vacuum cleaner may be manufactured in Malaysia and exported to Australia. “But much of the value embodied in that vacuum cleaner may well have been created in the UK,” she said. “It may be the engineering and the technical developments that led to the design of that vacuum cleaner. It may even be why the people in Australia may be willing to pay more for that vacuum cleaner; it may be the marketing, which might have been done in the UK. All of that means is that there’s an unmeasured export of services from the UK to Australia. So we benefit from trade in ways that we aren’t measuring.”

Key issues for corporates

Paul Watters, head of corporate research for S&P Global Ratings, provided a look at some of the practical issues that UK corporate treasurers are dealing with, post-Brexit. He used the aerospace industry to illustrate his point, since the UK is Europe’s leading aerospace manufacturing nation, and it is second only to the United States globally. “The Brexit challenges for the aerospace industry are quite typical of many of the issues that UK corporates are likely to face,” he said.

Tariff barriers would obviously be a key issue for aerospace. But there are also concerns that certain non-tariff barriers could erode the UK’s competitive position. “One might be onerous customs checks that introduce costly delays delivering into the EU, including rules of origin certificates,” he said. “The cost of compliance with the EU’s rules of origin regulations is expensive and can add up to 10 percent of the cost of imports.”

The supply chain supporting the major aircraft manufacturers is global. Tier one manufacturers rely on hundreds of tier two and tier three companies from multiple countries to supply them. Again, even non-tariff barriers can impose substantial economic cost in cross-border trade. “Firms managing their inventory on a just-in-time basis may need to increase their inventory levels and associated working capital to guard against production bottlenecks,” Watters said. “And where feasible, companies may need to consider sourcing supplies domestically.”

Driving innovation in the aerospace sector will require continued strong engagement with overseas companies. This may become more difficult in Europe, depending on the relationship between the UK and the EU once Brexit takes effect.

Lastly, immigration is of course a key issue. A major element for success is training and recruiting a highly skilled workforce, Watters noted. It will be critical to make sure that UK students are educated in advanced technology and manufacturing, but equally important will be the ability to identify key skill shortages and address them. “It will be important for the government’s post-Brexit industrial strategy to attract skilled workers from overseas,” he said. “This will form part of the reciprocity required to achieve potential new generation free trade agreements with the rest of the world.”

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